Australian Governance Policies - Assignment Example

Australian Governance Policies Name: Institution: Australian Governance Policies Question One After the end of the Second World War, the Australian financial system was highly regulated with the commonwealth government having a say in many issues regarding the way that banks and other financial institutions conducted their business. According to Fitzgibbons (2005), this regulation allowed the commonwealth government to determine the amount, type and the costs of the banks services. It also gave the government the power to control the foreign exchange and the entry of foreign banks into the country. This structure lasted until the 1970s when the deregulation process started. The process mainly entailed The Campbell Inquiry, which was supposed to look into the existing system and provide a report that made certain recommendations and suggestions. When the inquiry completed its report in 1981, it called for a process of extensive deregulation, because it believed that such a process would increase competition in the system and give it the competence of a free market (Fitzgibbons, 2005). Structure before Deregulation Before the government initiated the process of deregulation, there was a wide range of controls on the financial system. These regulations varied widely but they were mainly focused on the banking system and related sectors. One of the controls dictated the interest rates that the banks could apply to loans. This meant that the rates were largely similar for different institutions. In another regulation, the government subjected banking institutions to reserve and liquidity ratios. The authorities also issued directives concerning the general amount of loans, sometimes even going as far as to impose moral perspectives on the institutions regarding the entities that should be granted the loans and those that should not (Battellino, 2007). The government had instituted these deregulations for a number of reasons. One of the aims of the controls was to give the authorities a way of controlling the monetary aspect of the economy. The regulations also created a captive market specifically for government securities (Battellino, 2007). Through this market, the government had the ability to fund its own operations. The controls allowed the government to place a limit on the kind of risks that Australian banks could take. Through this, the banks were subjected to some form of government supervision. Through the regulations, the government was also able to direct funds to specific parts of the economy that it felt needed special attention. The final aspect of the controls was that ensured the exchange rate to remain stable, while also preventing the movement of domestic savings to foreign locations (Battellino, 2007). The changes that the government instituted in the financial system were wide and far-reaching. They revolutionized the financial sector in Australia, changing the way that banks conducted their business and interacted with the government. Debates regarding the process of deregulation started in the early 1970s. The process needed to be conducted tentatively and several bodies would be involved in the implementation such as the Australian Reserve Bank, the Treasury and the central government (Battellino, 2007). The government instituted the first key change to the Australian financial system in 1973. The policy change in question entailed the removal of controls over the interest rates that the banks could issue. This change gave banks more freedom over their operations allowing them to compete with each other (Battellino, 2007). By removing controls on interest rates, the government allowed the banks to offer competitive rates on their loans and deposits. The changes inadvertently reduce the effectiveness of the reserve bank and the liquidity ratios. The effectiveness of the reserve went down because the banks could compensate for changes within the reserve ratio by altering in their interest rates (Battellino, 2007). The authorities also introduced reforms that were supposed to loosen the interest rates charged on government securities (Battellino, 2007). Before deregulation, the government itself set the interest rates on the securities. With the new structure, the government would issue the securities at tender and then allow the self-regulating market to determine the interest rates. The treasury introduced these tenders in 1979, for notes, and 1982, for bonds (Battellino, 2007). Through this process, the government and the reserve bank were able to sell the required number of tenders. However, despite the positive effect, the government still lacked efficient monetary control. The exchange rate was still fixed and this proved to be a weak point within the system (Battellino, 2007). The authorities instituted further changes in 1983 when they floated the exchange rate. The authorities had started instituting changes to the exchange rate in 1971, but most of the changes had failed to bring the sort of benefits that the government desired. Most of the reforms failed to protect the domestic exchange rate from the overwhelming effects of foreign capital flows (Battellino, 2007). Floating the exchange rate rectified this situation. The forces of supply and demand determined changes in the rate and this eliminated the need for the Reserve Bank to involve itself in the process of regulating the rate. The authorities would no longer use reserve and liquidity ratios to regulate the banks, instead market dynamics would dictate the interest rates (Battellino, 2007). In the final set of reforms, the government removed the existing restrictions with regard to the entry of foreign banks into the Australian financial sector. The government also made changes to the processes involved in the establishment of these banks. The main aim of these sets of changes was to increase the competition in the Australian financial sector (Battellino, 2007). Along with the changes made to the systems concerning interest and exchange rates, these reforms ensured that the financial sector was highly competitive as banks could determine their rates and freely and use them to attract customers. Additionally, the introduction of foreign banks in the sector was supposed to spice up the competition and make the sector more competitive in the international arena (Battellino, 2007). These reforms had massive implications on the Australian financial sector, with the banking industry being particularly shaken up. The government deregulated the industry with the hope of making it more competitive, and Abbott (2005) argues that the process was successful in achieving that specific goal. There was also hope that the increase in competition for the banking sector would match economic reforms that the government had undertaken in other areas and make the national markets more competitive as well. In the early 1980s, the government witnessed the initial signs of the stiffened competition as a number of regional banks expanded their operations. A decade later, some regional banks merged in anticipation of the entry of international behemoths and the competition that would ensue between them, the foreign entries and the four major national banks. The four major national banks could not involve themselves in the mergers because the government had barred them from doing so (Abbott, 2005). The economic benefits of the competition were soon visible. The banks rose to become an important part of Australia’s financial sector with four major banks dominating the industry. The contribution of the banking sector to the national economy also increased. Between 1983 and 2009, the ratio between the assets owned by the banks and the gross domestic product had doubled (Abbott, 2005). According to Abbott (2005), as the banking activity grew, so did the assets owned by these banks. The high level of competition meant that these assets were consistently growing faster than the Australian GDP. This growth served as a strong indicator of the rate at which the intensity in the competition in the financial market was increasing (Abbott, 2005). Question Two Towards the end of the twentieth century, it had become evident that the Australian economy had not been doing as well as it should have been. The growth within per capita incomes had been poor and this affected the standards of living in the country. According to the Organization for Economic Cooperation and Development (OECD), Australia had fallen from fifth to fifteenth within a ranking of twenty-two selected countries (Corden, 2009). Different bodies argued that the economic malaise in Australia was mainly the result of a lack of competition in the national economy. Government organizations such as the Economic Planning Advisory Council, the Bureau of Industry Economics and the Industry Commission were of the opinion that the passive nature of the domestic economy was largely responsible for the decline in productivity, growth and the living standards within Australia (Corden, 2009). Previous reform movements had focused on opening up the Australian economy to foreign investors and making it competitive on the global arena. The Hawke Labor government had focused mainly on external barriers and worked to expose the country to international competition (Corden, 2009). This exposure then led to comparisons between Australia and her rivals leading to the revelation that the Australian economy was not doing so well, with infrastructure in the country lagging far behind that of its rivals. The local governments agreed that the solution to this malaise lay in stiffening the competition within the domestic economy. At a conference in 1991, the regional premiers agreed that competitive markets within the nation would benefit Australia and that there was a need for the existence of documented policies that could help to regulate the competition by dictating different terms (Corden, 2009). In response to this situation, the Australian Prime Minister created a committee and in October 1992 tasked it with carrying out an inquiry into the nation’s competition policy. This followed a decision made by the different local governments in the country on the necessity of such a policy (Newby, Hilmer, New South Wales & Independent Committee of Inquiry into Competition Policy in Australia, 1994). The Hilmer Report recommended that Australia adopt a national competition policy. The competition policy that Australia adopted in 1995 is wide and far-reaching encompassing rules that govern the conduct of firms along with different legislation, policies and government acts (Newby et al., 1994). In 1995, the legislature passed a package that contained the Commonwealth Competition Policy Reform Act of 1995 along with several other legislations relating to territorial application. In support of this act, state governments signed three agreements that were supposed to ensure that regional governments seamlessly implemented the 1995 act. They included the Agreement to Implement the National Competition Policy and Related Reforms (AINCPRR), Conduct Code Agreement (CCA) and the Competition Principles Agreement (CPA) (About the National Competition Policy, 2007). Each of the three agreements had its own purpose relating to the smooth implementation of the competition act. The CPA laid out the code that the governments would follow as they implemented the competition policy. The CCA determined the conditions for extending the reach of the Trade Practices Act, a critical law related to the competition policy. Lastly, the AINCPRR established the pledges that the state governments had made towards the reforms (About the National Competition Policy, 2007). The national competition policy was important because it revived the domestic economy. The direct impact of the reforms can be analyzed by looking at the specific reforms that were introduced. Corden (2007) divides the reforms into two categories. The general reforms affected all states and businesses. One key facet of these reforms was the extension of certain provisions inside the Trade Practices Act of 1974 to enterprises and government companies that were unincorporated. The reforms were also going to bring changes to the way that monopolies carried out their business. The authorities also instituted several structural reforms, with most of them changing the way that these monopolies were structured (Corden, 2007). The 1995 national competition act also set up independent bodies that were supposed to monitor and in some cases dictate prices for monopolies that provided services. Additionally, the reforms created a national body that would allow third parties access to infrastructural services that had the characteristics of natural monopolies. Since infrastructure was one of the areas largely affected by Australia’s passive economy, the government made major reforms targeting specific industries related to the sector. In the electricity and gas industries, there were reforms affecting the structure, governance, pricing and regulation of the products and services. With regard to road transport, the changes introduced charges for heavy vehicles. There was also a uniform approach adopted in the regulation of heavy vehicles to improve road safety. Lastly, the government introduced several changes to the water sector to make it more sustainable. The changes would also make the sector more responsible in the provision of its services (Corden, 2007). In 2011, the government made more amendments regarding consumer rights and protection. The existing legislation, Trade Practices Act of 1974, had several limitations owing to conflictions with the Commonwealth constitution (Latimer 7 CCH Australia Limited, 2011). Due to these shortcomings, the Commonwealth was unable to create laws governing certain issues. In January 2011, the Australian Consumer Law (ACL) replaced the Trade Practices Act. All territories agreed to the ACL, with the aim of creating a national economy that was flawlessly uniform. The ACL was part of the Competition and Consumer Act of 2010 (Latimer 7 CCH Australia Limited, 2011). These laws applied to every state and territory and overcame the limitations of the Trade and Practices Act. The Australian Competition and Consumer Commission (ACCC) was set up to take care of the administration of the Competition and Consumer Act of 2010 (About the ACCC, n.d.). The independent authority focuses on making markets within Australia work for the sake of consumers in the country. The body’s main role is to protect, support and embolden the competition in domestic markets so that they can contribute more to the economy while still safeguarding consumers. Through the ACCC, companies are barred from engaging in activities that are harmful to the consumers and the competitive nature of the market (About the ACCC, n.d.). The ACCC’s four main goals reflect its priorities and its role within the Australian market. The first goal for the body is to make sure that competition is sustained at a heightened level, and that failures in the market are quickly resolved. The authority’s second main aim is to safeguard consumer interests and make sure that fair trading markets receive the support that they need. Thirdly, the ACCC is responsible for ensuring that entities, use, invest in and operate monopoly infrastructure fairly and competently. The last main aim of the ACCC is to make sure that there is increased engagement between the authority and the different groups that are affected by the policies and actions of the body (About the ACCC, n.d.). Question Three The deregulation of the Australian financial system changed the nature and shape of the industry. In the mid-1990s, analysts began to claim that the changes made by the government had complicated the regulatory body and that this was muzzling growth in the sector. The analysts pointed out inconsistencies in key areas, which threatened to bring down the entire system (Carmichael, 2004). Some of the inconsistencies were related to the regulation of related services and products and the manner that the authorities dealt with consumer needs. To deal with these problems, the government commissioned an inquiry headed by Stan Wallis that would outline the factors that could bring additional reforms to the financial markets (Carmichael, 2004). The Treasury expected the Wallis inquiry to carry out three primary objectives. The first was to provide a complete analysis of the effects of the deregulation process that the government initiated in the 1980s. The government also tasked the inquiry with analyzing the different elements that authorities could use to bring change in the industry. The inquiry’s third challenge was to come up with a regulatory framework that could be used to make the financial system competent and flexible while still being competitive (Carmichael, 2004). One thing that made the inquiry special was that its role in the reforms was more about preventing a crisis in the future than dealing with one that was already in place. The inquiry was not supposed to undo any of the past regulatory reforms, rather it was supposed to streamline and realign the existing regulation (Carmichael, 2004). In its final report, the Wallis Inquiry outlined several shortcomings regarding the Australian financial system. The committee discovered that there were plenty of inefficiencies in the system. Estimates suggested that these inefficiencies were costing users of the system as much as forty billion Australian dollars annually (Carmichael, 2004). The inquiry found different kinds of problems concerning a wide range of issues such as banking branch costs, funds management costs and insurance expenses ratios. The committee came to the conclusion that there was a wide range of areas that stood to benefit from the redesigning of the regulatory system that would potentially eliminate several obstacles and boost competition in the sector even more (Carmichael, 2004). The committee outlined three drivers of change that it felt were a significant aspect of the regulatory implications. The inquiry outlined changing consumer needs, technological innovation and increasing levels of deregulation as three factors that would have powerful effects on the development going on in the financial sector (Carmichael, 2004). Additionally, increased focus on competition and competence would see a decline in the differences between products as well as markets. This would severely weaken the regulatory authorities’ ability carry out their work within the Australian economy. The committee’s reforms recommendations were very specific in the areas that they targeted and the actions that they called for. Most of these reforms concerned the regulation of the financial sector and they called for a wide range of measures such as the creation of a flexible regulatory structure that would be in charge of monitoring the forces of change that are found within the financial system (Carmichael, 2004). The committee also made recommendations that would make the aims of regulation clearer. Other recommendations would affect the competitiveness of the national financial system on the international arena and streamline the activity in financial markets to make sure that the cost falling on consumers was lowered. Following the government’s adoption of the Wallis report, the Commonwealth authority created four regulatory bodies. The Australian Competition and Consumer Commission (ACCC) was placed in charge of monitoring and regulating competition in the nation. The second body was the Australian Securities and Investment Commission (ASIC), which was in charge of market conduct, and by extension, consumer protection. The Australian Prudential Regulation Authority (APRA) was set up to monitor and regulate activities such as deposit taking, insurance and pensions. The fourth body that the government created was the Reserve Bank of Australia (RBA), which was placed in charge of looking over the stability of the system by manipulating the monetary situation (Carmichael, 2004). The biggest contribution that the Wallis Inquiry made to the financial sector was the streamlining of the regulatory bodies. Some of the bodies set up dealt directly with banks and other financial institutions and this went a long way towards preventing the kind of economic meltdown that was witnessed in the West. Fraudulent activity by investment banks in the US and Europe played a role in causing the economic meltdown of 2008. These banks were operating in an unmonitored environment and stiff competition between them resulted in fraudulent activity such as the issuance of subprime mortgages. By streamlining the regulation in the Australian system, the government had ensured that such as crisis could not happen. Bodies such as the APRA made sure that the basic activities of banks in the country were closely monitored, preventing the kind of activity that had led to the 2008 recession. According to Pearce (2007), the importance of the Wallis reforms is outlined by the growth witnessed in the financial sector following the deregulation process. The process had been initiated in the mid 1980s and by 1995, the sector was worth an estimated AU$ 347 billion (Pearce, 2004). By 2007 (just before the global economic meltdown), steady growth had seen the value of the sector rise to more than a trillion Australian dollars. This means that a collapse in the system would have led to the loss of a sizable amount of that money, and placed much more of it at the same risk. References Abbott, M., Wu, S. & Wang W. C. (2005). The performance of the Australian banking sector since deregulation. Proceedings of the 34th Australian Conference of Economists. Carlton, Vic.: Blackwell. About the ACCC. (n.d.). Retrieved from http://www.accc.gov.au/about-us/australian-competition-consumer-commission/about-the-accc About the National Competition Policy. (2007). Retrieved from http://ncp.ncc.gov.au/pages/about#reforms Battellino, R. (2007). Australia’s experience with financial deregulation. Proceedings of the China Australia Governance Program. Melbourne: Reserve Bank of Australia. Carmichael, J. (2004). Australia’s approach to regulatory reform. In J. Carmichael, A, Fleming & D, Llewellyn (eds.), Aligning financial supervisory structures with country needs (pp. 93-112). Washington: World Bank. Corden, S. (2009). Australia’s national competition policy: Possible implications for Mexico. Retrieved from http://www.oecd.org/daf/competition/45048033.pdf Fitzgibbons, A. (2005). The financial sector and deregulation in Australia: Drivers of reform or reluctant followers? Proceedings of the 34th Australian Conference of Economists. Sydney: Economic Society of Australia. Latimer, P. S., & CCH Australia Limited. (2011). Australian business law 2012. North Ryde, N.S.W: CCH Australia. Newby, J., Hilmer, F. G., New South Wales., & Independent Committee of Inquiry into Competition Policy in Australia. (1994). National competition policy: Report by the Independent Committee of Inquiry (The Hilmer report). Sydney: NSW Parliamentary Library. Pearce, C. (2004). Wallis 10 years on: Protecting Aussie wealth. Retrieved from http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=speeches/2007/010.htm&pageID=005&min=cjp&Year=&DocType=1 Read More